India’s growing cash hoard and the eleventh thesis on Feuerbach

The latest data from the Reserve Bank of India (RBI) shows that, as on 16 September 2016, currency with the public was growing at 17.7% from a year ago. Its rate of growth a year back was a comparatively mild 11.4%. Photo: Bloomberg

There has been much self-congratulation on India being firmly on the road towards a cashless society. There is little doubt that as the economy develops India will move towards a society where cash is used less and less for transactions. Other countries have travelled down that road and there’s no reason India will not follow suit. But while we await the transition to a cashless society, a more immediate problem is the rapid rise in cash holdings by the public.

As the chart shows, currency holdings with the public have been rising at a giddy pace in the past few months and have been accelerating. The latest data from the Reserve Bank of India (RBI) shows that, as on 16 September 2016, currency with the public was growing at 17.7% from a year ago. Its rate of growth a year back was a comparatively mild 11.4%.

Moreover, while over the years the rise in currency holdings with the public has usually been lower in percentage terms than the increase in money supply, that trend has reversed over the last year. Since September 2015, year-on-year growth in cash with the public has outstripped growth in money supply every single month. That means the proportion of cash in money supply is rising. This column had pointed out earlier that almost a third of the increase in households’ financial assets in 2015-16 was in the form of currency holdings. That proportion must have gone up even more this fiscal year.

Many explanations have been given for the rise in cash holdings, ranging from hoarding black money in cash rather than in gold or real estate—possibly a consequence of the government’s threats to unearth unaccounted money—to election expenditure to higher wages in rural India to higher food procurement to unappealing bank deposit rates.

But as the eleventh thesis on Feuerbach said, “The philosophers have interpreted the world in various ways; the point, however, is to change it.” Large cash holdings affect the transmission of monetary policy and are a retrograde trend in the march towards a cashless society. The central bank and the government need to find out the reasons and take steps to reverse this pernicious trend.